According to reports, the latest thinking in Whitehall on the problem of the EU customs union after Brexit, is that it might end up being no problem at all.

The basic choice for the U.K., as most analysts have seen it up till now, is between staying in the customs union, avoiding tariff barriers with the EU but losing the ability to strike trade deals with third countries, and leaving the customs union, throwing up tariffs with the EU, but liberating a buccaneering U.K. to go forth and trade with the world.

But a third approach is gaining traction at senior levels in Whitehall, with officials pointing out that it’s possible to have a customs union with the EU that covers trade in goods, while being free to strike new deals further afield in the services sector.

Services — business advice, consultancy, banking, insurance — represents about 80 percent of the U.K. economy. So any Brexit deal that allows the U.K. to improve future trading terms in these areas with partners like the U.S. and the BRICs countries, while remaining wedded to the EU customs union in terms of its goods trade, could be the best of both worlds.

It also has the potential of avoiding an acrimonious political split at the heart of government between those, led by Trade Secretary Liam Fox, who prioritize Britain’s global role after Brexit, and the soft(er) Brexiteers like Chancellor Philip Hammond, who want to minimize economic turbulence — possibly by maintaining customs union arrangements.

There is a problem, though. Historically, it has proved mighty hard to strike free-trade deals that significantly liberalize the trade in services. Tariff barriers are relatively easily knocked down in bilateral trading agreements, but they are not what matters here. In services trade, it’s more about harmonizing rules and regulations — a far tougher thing for countries with different systems to agree on. Influential research by Dr. Monique Ebell at the National Institute of Economic and Social Research last year found that past FTAs around the world have not, to date, led to any significant increase in bilateral services trade.

A customs union with the EU in goods alone? It’s certainly a viable Brexit solution — but it’s no cheat sheet for the hugely prosperous, win-win Brexit of some politicians’ dreams.

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Michal

Has anyone asked the EU if it is at all interested in such a deal?

Posted on 7/3/17 | 4:11 PM CET

cinceur

@Michal

Not yet, no.

Posted on 7/3/17 | 4:12 PM CET

Obediah

Hmm, I’m very sceptical about this.
On the one side, we’d be making a trade agreement with the EU that keeps the status quo (sort of) on goods where we have a trade deficit but adds barriers where we have a trade surplus.
On the other side, we’d be hoping for trade deals outside of the EU with countries who would certainly want to sell us their goods if they were to allow us to sell them our services. Doesn’t sound likely that there would be many takers.
Seems like a lousy solution to me…

Posted on 7/3/17 | 4:22 PM CET

Bob

The view of British voters on whether a Brexit deal is a good or bad deal is likely to come down to three factors.

(1) The driving force that led to the outcome of last year’s Brexit referendum appears to be voters’ desire to reclaim the ability of the UK to control immigration, and that is a critical factor. Any Brexit deal that does not provide that risks making UK voters think that the whole thing was a waste of time. This is a bigger difficulty for the negotiations than it appears to be, because the EU side of the negotiations is being conducted by people who are not directly accountable to voters, whole the UK negotiators are directly accountable to voters.

(2) Voters are also likely to care if Brexit negotiations do not result in the UK’s reclaiming absolute sovereignty by ending the jurisdiction of EU institutions over the UK. EU negotiators may see this as a technical issue, but no politician would ever be able to justify continued EU jurisdiction to the voters. The fact that the EU side does not appear to recognize why this is a non-starter is a symptom of what is going on.

(3) The “Brexit bill” demanded by the EU side is likely to be viewed on a sliding scale and in the context of the UK government’s post-Brexit fiscal and social spending policies. Brexit is likely to reduce UK tax revenues over the short term, and harder the Brexit, the greater the reduction in tax revenues. If the EU insists on a 100 billion euro Brexit payment, that virtually requires any UK government to say, “That money is better spent on maintaining current levels of social spending during the first five years after a hard Brexit.” On the other hand, if the EU reduces its Brexit payment demand to zero, that makes it more difficult to justify a hard Brexit to British voters. To the extent EU technocrats are seeking money from the UK as a pragmatic way of making up for loss of the UK’s net contribution of 10 billion euros to the EU budget (the amount the UK pay in minus the amount the UK receives from the EU budget), it is far more likely that UK Brexit negotiators will agree to some payment along those lines as part of a trade agreement in which the UK pays x amount to the EU for access to (but not membership of) the single market based on terms that do not include Britain’s acceptance of freedom of movement or the jurisdiction of EU institutions over the UK. The alternative is to find a way of explaining to UK voters why it was acceptable for the UK to have been paying in 10 billion more than it received from the EU in the first place, and it is unlikely any politician would ever be able to do that.

It’s very difficult to believe that anything else could work, given the factors that led to Brexit in the first place.

European

Endorendil

As long as people realise that this solution does not leaf to frictionless trade. There will still be customs, delays, costs. It is still the end of easy cross-channel supply chains….

Posted on 7/3/17 | 5:37 PM CET

bojo's mojo

Seems like a pretty common sense approach.
I wonder why this didn’t come up earlier.

Posted on 7/3/17 | 6:06 PM CET

Jim

This would be a terrible decision for the UK. We would go to each nation outside the EU and request free trade around services which the uk would dominate but not be able to buy their goods. Why would any nation want that?

Posted on 7/3/17 | 6:19 PM CET

Deirdre

This is nonsense, kite flying by Politico, makes no sense for the UK to stay in the customs union for goods. Customs union is irrelevant for financial services, there is no single market for financial services. The much hyped passporting rights are being superceded by equivalency rules.

Posted on 7/3/17 | 7:09 PM CET

Jodocus5

Hmm, it’s basically asking the EU to trade free movement for convenient trade access with the possibility to bar UK services thrown in as a sweetener.

Free trade for goods is in the EU interest whereas free trade of services is not (we want to take back control of our financial services, right?).

There is the issue of product regulations though. As long as the UK agrees to abide by EU product regulations (in which it would no longer have any say) , by treaty, and maintain external tariffs, neither customs checks nor UK-EU tariffs would be needed. I wonder if the UK is prepared to swallow that. If it is, I’d be in favour.

Posted on 7/3/17 | 7:45 PM CET

Ben

Utter rubbish. Customs Union is done. Its a done deal

Posted on 7/3/17 | 8:46 PM CET

Ben

So no trade on good in world but services which means free movement. So rather gutting immigration we increase and still become enslaved to eu goods so they can sell their rubbish cars. Thats not having your cake and eating it. That is bending over for the ultimate royal shafting. Dear EU NO DEAL SOD OFF

Posted on 7/3/17 | 8:48 PM CET

bradomin

Strange. Very, very roughly the UK exchanges services for rEU manufactures. So, renounce to frictionless services trading for highly speculative one with other economies? The UK has not comparative advantage whatsoever in financial and other services in America (e.g. New York) or Asia (e.g. Hong Kong, Singapur, Tokyo, …). Again, the triumph of hope over experience …

Posted on 7/3/17 | 10:59 PM CET

YellowSubmarine

An ‘associate member’ of the European Free Trade Association, could allow UK to sign up to Efta’s existing free trade deals outside the EU, rather than negotiate them from scratch or fall back on bare WTO terms.

Efta, set up in 1960, consists of Switzerland, Norway, Lichtenstein and Iceland.

By joining Efta as an associate member like Finland, the UK would have access to its free trade deals but would be able to avoid the EU’s rules on free movement. The UK’s Institute of Directors have also suggested looking at the merits of applying to join Efta, so as to gain access to its 27 free trade deals covering 37 countries and 900 million consumers.

Advantages of Efta include its relatively small trade focused bureaucracy that has no big political pretensions.

Efta membership also guarantee free trade between its members. Its four member states are free to negotiate bespoke trade deals with countries that Efta also has agreements with, something that would benefit the UK.

Efta as a block, for instance, has a trade deal with Hong Kong, but Switzerland, an Efta member, has an additional deal with China.

Norway, Liechtenstein and Iceland have said they would welcome the UK into their organisation.